ILMN Illumina Inc

We reaffirm our Neutral recommendation on Life Technologies (LIFE) following its fourth-quarter 2011 results.  The company reported a strong quarter with both revenues and adjusted EPS going past the Zacks Consensus Estimates.

Life Technologies’ performance has been adversely affected by a sustained slowdown in government and academic research funding over the past few quarters, a trend that is expected to continue in 2012. This is significant since the company derives almost 45% of its revenues from these customers.

However, the company is repositioning itself for a slower growth environment by lowering its cost structure and increasing its focus on R&D initiatives. The company has recorded robust revenue (CAGR of 12% to $3.73 billion in 2011) and earnings growth (23% to $3.73 per share) over the past 3 years. Moreover, free cash flow clocked 33% growth over the same period.

Over the past couple of years, the company has been focusing on creating an optimal portfolio of products through innovations and acquisitions, the latest being Ion Torrent. The company derives 20% of revenues from proprietary instruments, which in turn drive demand for the high-margin consumables that account for the remaining 80%.

We are also encouraged by Life’s strategy to strengthen its presence in high growth geographic markets such as Latin America, the Middle-East, China and India. Life Technologies sniffs immense potential in applied markets where technologies can facilitate biological research in fast growing industries such as forensics, food and water testing. Over the next few years, Life’s focus on developing industry-leading franchises in high-growth technology areas, applied markets and emerging geographies will be the key drivers for long-term growth.

We are impressed with the robust growth recorded by the Ion Personal Genome Machine (“PGM”) that was launched in December 2010 taking the total number of system placements to 700 in 2011. Maintaining the upbeat trend, PGM sales were strong during the reported quarter, growing on a sequential basis.

The company is satisfied with the progress made so far with Ion Torrent technologies and expects the growth momentum to continue. This growth will be supported by more PGM placements and the scheduled launch of Ion Proton Benchtop sequencer in the second half. In October 2011, the Ion franchise was further boosted by the launch of the Ion AmpliSeq Cancer Panel to help scientists to sequence dozens of genes in cancer research samples using a simple workflow. With the launch of new products, contribution of the Ion portfolio is expected to increase over the next few quarters.

Life Technologies sets much in store by the scheduled launch of the Ion Proton sequencer in the second half of 2012 though competition in the DNA sequencing market is increasing. While Illumina (ILMN) plans to launch its HiSeq 2500 in the second half, Oxford Nanopore Technologies’ MinION is also in the queue, which is a disposable DNA sequencing device the size of a USB memory stick.

Our recommendation is backed by a Zacks #3 Rank (“Hold”) in the short term.

 
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